New boss in dash for simplicity at bloated Rolls-Royce

FILTON, England, Dec 22 (Reuters) - Twelve months and 80
signatures: that is what it recently took Rolls-Royce to approve
a small change requested by a supplier, symptomatic of a
business that had become as complex as the engines it makes to
power the world's biggest jets.

New chief executive Warren East says the number of sign-offs
should be closer to 15, and it's an example of the complexity he
says has jeopardised the financial health of Britain's
engineering flagship, a rival to General Electric in
making the engines of the world's largest passenger planes.

"Virtually every process I look at is over-complicated,"
East told Reuters in an interview.

He has met 70 investors in the last six weeks, seeking
support after oil and gas customers cut orders for marine
engines and some aero engines were retired
earlier-than-expected, exposing poor financial discipline and
operational problems.

The share price has nearly halved since May, leading to
takeover talk and reports of UK government concern that a key
military contractor could fall into foreign hands.

At Rolls-Royce's factory in Filton, near Bristol, fitters
make and maintain engines to power Tornado and Typhoon fighters
in buildings that look more like Internet-era warehouses than
the oily workshops of the past.

East says the problem is the layers of bureaucracy above the
shopfloor.

SIMPLICITY AND PACE

East, who became chief executive in July, announced a
restructuring last month, under the mantra of "simplicity and
pace", aiming to save 150-200 million pounds annually by 2017.

A first step was scrapping a layer of top management.

"It is going to take four to five years," he said, but hopes
to get 80 percent of it done in 18 months to two years.

It is not the first time the engineering powerhouse has
taken aim at its own complexity. In the 1990s, the Derwent
Project sought radical cuts in lead times and costs.

But East, who built British chip designer ARM into a
world-beating supplier to the likes of Apple and was a
non-executive director at Rolls before he replaced John Rishton,
is making a new effort to tackle management layers and red tape.

The 54-year old, who likes to hold candid town-hall
meetings, says things could get worse before they get better. He
does not rule out another profit warning.

Analysts are expecting pretax profit to plunge next year to
about 725 million pounds, around the level last posted in 2006,
after a decade of growth ended in 2014.

Rolls-Royce's fortunes have been entwined with Britain's
national interest since it built its first aero-engine for the
Royal Air Force in World War One, and it was nationalised in the
1970s after a new turbo-fan engine almost destroyed the company.

It was privatised in 1987, although the government kept a
"golden share" that can be used to block a takeover.

Recent press reports said the British government was
considering nationalising Roll-Royce's nuclear submarine unit or
merging some of its businesses into BAE Systems,
Britain's other defence heavyweight, if the company's
difficulties worsened.

"Of course it's possible that there's all sorts of people
dreaming up lots of strategies for Rolls-Royce," East said.

"(But) I can tell you that I've had no hint whatsoever of
any reality behind the stories."

MARGINS

Rolls has historically struggled to match the 20 percent
level of margins made by its larger U.S. rival GE, which
benefits from its exposure to the high-volume narrow-body
aircraft market. Before recent woes, Rolls was targeting margins
of around 15 percent.

Rolls-Royce is on course to take a 50 percent share of the
250-seat plus twin aisle wide-body aircraft market by 2020, up
from 30 percent now.

It has been locked out of narrow-body jets, which carry up
to 200 passengers, since 2011 when it decided to sell out of a
multinational alliance making those engines to fellow member
Pratt & Whitney.

Its former U.S. partner has independently notched up
thousands of engine sales for the revamped Airbus
A320neo, prompting debate over whether Rolls made a blunder.

East is not excluding taking Rolls-Royce back into that
market, but says it is not a priority.

"I don't rule out narrow-body in the long term but we have
got to get through to make the business model work in the first
place with one (wide-body) space," he said.

East also said he was open to possible new developments
including a "middle of the market" 240-seater being studied by
Boeing and a possible engine upgrade of the slow-selling
Airbus A380 superjumbo.

LIMITED ROOM FOR MANOEUVRE

The arrival of U.S. activist investor ValueAct on the
shareholder register in July ramped up expectations of change.

But East, who met the U.S. hedge fund earlier in December,
denies reports ValueAct wants to force Rolls-Royce to divest its
marine unit.

"My thoughts and their thoughts are pretty much completely
aligned," he said.

But the share price drop to about 570 pence from a year-high
of 1,046 pence in May has raised the prospect of suitors.

Jefferies analyst Sandy Morris believes any suitor would
have to offer at least 10 pounds per share for the company.

"There is a tacit acceptance that the business is worth
vastly more in 2020 and that by 2025 is worth vastly more again"
he said, referring to the growth promised by the new engines on
order.

But Rolls-Royce has issued four profit warnings in just over
a year and placed the dividend under review and the consensus
forecast is now for it to be cut.

"We are supportive of the path that Warren East has set out
for the company, though he has limited room for manoeuvre," Ben
Ritchie, senior investment manager on the UK and European
equities team at Aberdeen Asset Management, and the company's
second biggest shareholder, told Reuters.

On the shop floor at Filton, where the engines for Concorde
were once made, pride in the company is undiminished.